Some week!

This week has felt like a relentless game of stimulus-response, leaving little room for thoughtful reflection. Instead of chasing answers, perhaps we should focus on asking better questions: what’s driving price action — PE cycles, risk premia, discount rates? What secular trends might transcend these factors —defence, dividends, low-volatility, quality? Have US large caps entered a sideways market necessitating a shift in investor behaviour and selling discipline? Can a US industrial renaissance occur without a weaker dollar? If not, what does that mean for EM, real-assets, bitcoin? If industrialization rises at the expense of financialization (Main Street vs. Wall Street) should we rotate out of financials into materials?

And furthermore: can China rebalance toward consumption, and who benefits if it does? Is this Europe’s moment to reflate beyond defence spending? Can the UK foster a domestic equity culture? Is inflation volatility now baked into the market landscape, and what new allocation models might emerge as a result?

Success in markets often hinges on answering where to compete, not how. Over the coming weeks, we’ll aim to ask — and hopefully answer — these critical questions. For inspiration, check out Josh Waitzkin’s "Most Important Question" (MIQ) process — a framework for identifying what matters most. It’s a discipline worth adopting, especially during noisy weeks like this.

So…what matters most?

It's worth noting that the US market peaked well before ‘Liberation Day’. DeepSeek and DOGE had knocked out the AI and deficit spending legs of the liquidity stool. And many (including us) had expected a more sobering period for technology stocks well before these events took place. Now the question is: will the patient recover and reach new highs, or will rallies be sold in range-bound markets? Time will tell but one notable shift is the growing emphasis on regional diversification.

While this idea isn’t new, it feels more urgent now. If rebalancing flows align with increased domestic allocations (mandated or otherwise), we could see a significant tide reversal favouring non-US assets—helped by trade agreements like those Britain is negotiating (recent talks seem to have been constructive).

PS: I found it fascinating that the Dutch regulator has warned of risks that large holdings of US equities by pension funds have placed on the country. Could such force pressure towards adopting a more homeward bias? Nationalism seems to be quite catching, after all.

The goal

What matters most regarding tariffs and trade negotiations? The Trump administration’s defining ideology centres on America’s twin deficits undermining its economy, society, and geopolitical power. It believes that its reserve currency and security shield benefits disproportionately favour trade partners, and have led to an overvalued dollar and the hollowing out of America’s industrial base. It emphases that robustness and security of the supply chain is paramount.  Trump has argued that: “if you don’t have steel, you don’t have a country”; and that these factors have, however, enriched Wall Street and wealthy Americans, whereas Main Street has been hammered, a contrast best expressed last year by a record number of folks visiting food banks in the same year as record numbers visited Europe.

While Trump doesn’t want the US dollar to lose its status as the World’s reserve currency, he seeks burden-sharing from trading partners through lower barriers for US goods, debt term-outs to lower coupon century bonds, increased NATO defence spending and (some suspect) through currency revaluation. Punitive tariffs could push trade partners toward currency accords in exchange for tariff reductions—a scenario Trump currently seems confident about, even with China.

The implications for markets could be profound. I’m just unsure which ones.

The likely outcome

If MAGA aims to revitalize manufacturing (Make America Make Again), it could boost real wages for the bottom 50% who own no equity but carry debt. Lower energy prices and interest costs are central to this strategy. A weaker dollar would further improve competitiveness. If successful, currency accords and a weaker USD could create generational buying opportunities for inversely correlated assets—EM equities/debt, EM consumption proxies, supply-constrained real assets (gold, silver, copper), and related sectors like materials and extraction economies (e.g., Australia, Canada). Bitcoin might benefit too.

An industrial renaissance could also favour homegrown sectors like construction, aggregates, cement, and steel. Case in point: Vulcan Materials has delivered the second highest compound returns historically, and it’s hard to ship-in aggregates from abroad; tariffs will also make it harder (= more expensive) to ship steel in as well. One suspects Trump’s upcoming Made in America ETF will include these sorts of things. If you’re interested, he’s also filed an ETF for Energy Independence. And Bitcoin.

Chinese consumption

China’s ability to rebalance from export-led growth to consumption-driven growth is pivotal. I’m positive here. China is improving collateral value in equity markets and housing to boost consumer confidence via wealth effects—a playbook reminiscent of US policy post-GFC. Expanding social insurance and pension programs could unlock savings (40% of GDP) and drive consumption further. Accelerating Hukou system reforms could unleash spending power from rural migrants who currently save more due to limited access to welfare benefits. Adding 300 million people (equating to the fourth largest country population globally) into the consumption mix would be transformative.

As we’ve discussed prior, it’s seldom wise to ignore the command of a command economy.

Gold

Gold remains central to the global reordering as an alternative reserve asset—a trend unlikely to reverse soon. Falling oil prices could lower energy costs for miners and drive earnings upgrades—a rare bright spot compared to the broader market being likely to use Trump’s tariffs as the excuse to cut guidance in a giant case of: ‘sorry Miss/Sir, the dog ate my homework’.

Total returns

Range-bound markets are nothing new: think the Dow between 1929-1954 or US equities between 1968-1982 and 2000-2013. Japan’s Nikkei remains below its 1989 peak; Eurostoxx still hasn’t surpassed its 2000 level. These periods compress multiples over time as excess bull-market euphoria unwinds. While index returns stagnate during such periods, individual stocks can thrive — quality companies with earnings growth and dividends often outperform.

And dividends still capture my interest. They’ve historically accounted for 40-50% of shareholder returns (higher during inflationary periods). They grow over time, hedge against inflation better than bonds and unlike current PE distributions are often paid out of unlevered cash-generation. The S&P Utilities Index, for example, has with dividends reinvested delivered similar returns to the Nasdaq. Savita Subramanian shows that buying the second quintile of Russell 1000 dividend stocks is a strategy that consistently outperforms across market cycles.

And Buffett exemplifies this approach; his Coca-Cola position now yields him +60% on his original purchase price thanks to annual dividend growth. Perhaps this explains why he didn’t sell any recently as he accumulated his enormous war chest.

As an aside, I wonder what he buys next (I bet it pays a dividend).

The discount rate

Finally, the discount rate is crucial for all assets but especially stocks. According to this FT article, “every 1-percentage-point change translates to ~20% moves in equities”. While the rate has risen recently (from 3.1% to 3.6%), they remain below recent averages, and well below pre-1995 averages where they consistently ranged between 5 and 8 percent.

Meaning that if rates revert higher over time, risk premia may need further adjustment—another reason dividends look attractive as part of long-term allocation strategies.